Can AI work? This week, Microsoft ushered in its most important earnings report in years

The unrelenting AI hype has made the big technology giant Microsoft, which was the first to seize the opportunity, reach a new peak. So far this year, Microsoft’s share price has risen by 44%, its market value has increased by nearly 800 billion US dollars, and its PE-TTM has exceeded 31 times, far exceeding 20 times the average value of the market.

However, how much does AI help the business, and how quickly can the huge investment be converted into book revenue? How big is the imagination space for the future? Analysts across Wall Street are closely watching Microsoft's performance.

After the U.S. stock market closes this Tuesday, Microsoft will announce its financial results for the fourth quarter and full year of FY23 (Microsoft’s fiscal year is from July 1 of the natural year to June 30 of the following year), and the answer will be revealed at that time.

Wall Street analysts mostly bullish

The vast majority of Wall Street analysts are optimistic about the performance expectations of the technology giant. According to CNBC data, 85% of analysts rate Microsoft as hold, buy or overweight.

On the eve of the release of the results, many institutions raised their target prices for Microsoft. The current average target price is $373, which means that Microsoft still has about 10% room for growth.

On Friday, Goldman Sachs analyst Kash Rangan raised his price target on Microsoft to $400. He believes that the potential market size of AI-related fields in the world is as high as 135 billion US dollars, and Microsoft is the leader among them, and is expected to occupy 15%-30% of the market share in 2026. **

Citi analyst Tyler Radke also raised his price target on Microsoft to $425 last week. He believes that **Microsoft Copilot has great potential. Even if the penetration rate is only 5%, this product can bring at least $5 billion in incremental revenue to Office 365, which is close to half of Office 365's sales revenue to enterprises ($9.4 billion) last quarter. **

Nancy Tengler, chief investment officer at Laffer Tengler, told CNBC:

"I don't think it's hype, I think they can monetize it. Almost everyone agrees that generative AI is going to be key for the next few decades, and I think Microsoft is way ahead of everyone else."

**Developing and maintaining AI is too expensive? Capital expenditures may climb sharply, or drag down Microsoft's performance **

Copilot, an AI application integrated into the Office office suite, has won unanimous praise from industry observers for its magical "magic" such as "one-click generation of PPT".

Many analysts predict that through AI software services, Microsoft can significantly increase its revenue and become a new growth curve.

However, Copilot's high $30 per user/month pricing has many skeptical about its profitability and user appeal.

Last Wednesday, Guggenheim analyst John DiFucci called Copilot pricing "unexpectedly high" in a note.

Technology investor Paul Meeks also believes that Microsoft Copilot pricing is too aggressive and may exceed the budget of many ordinary users. He believes that if Microsoft fails to significantly increase its revenue guidance and growth expectations in this earnings report, the stock price may decline.

In addition, the growth of Microsoft's cloud computing business is also one of the focuses of analysts.

Alex Zukin, an analyst at Wolfe Research, pointed out in a recent report that **As Microsoft deepens in the AI field, the focus of the market will shift from what is good enough to how good it can be. **

Alex Zukin believes that Microsoft Azure is expected to achieve 27.5% revenue growth this quarter. He pointed out that Azure is winning the market growth brought about by the AI boom. He expects **Azure revenue growth will accelerate in this quarter and the first quarter of FY24, and by the end of this year, revenue growth will reach 30% year-on-year. **

However, the pressure on computing power resources brought about by the AI boom also means that in order to keep up with the new market demand, Microsoft's capital expenditure may increase significantly, dragging down its performance. Microsoft executives also warned in the last quarter's earnings conference call that capital expenditures on AI in the fourth quarter will increase significantly.

**Microsoft’s FY23 capital expenditure consensus is expected to be $32 billion, accounting for 13.5% of estimated revenue, but according to Jefferies analyst Brent Thill’s estimates, Microsoft’s capital expenditure may be as high as $35 billion to $40 billion, accounting for 15% to 17% of estimated revenue. **The costs associated with the development, hosting, and servicing of Microsoft's AI products are prohibitively high. could drag down its performance.